Health Insurance

Just as you may be put out of business by a large legal judgment against you if you don't have adequate liability coverage, the same thing could happen because of a prolonged hospital stay or medical treatment if you lack sufficient health insurance coverage.

Comparing policies. Besides the differences in premiums to be paid and yearly deductibles to be met, there are many ways that health insurance policies can differ. You should consider the following factors when comparing policies:

  • Maximum lifetime benefit. The higher, the better. Some policies have unlimited benefits, while others provide limits (such as $250,000, $500,000 or $1,000,000) on the total amount of benefits that will be paid in a lifetime.
  • Co-payment. The co-payment amount is the percentage of covered expenses that you must pay. If the policy provides for a 10 percent co-payment, you will be reimbursed for 90 percent of your covered expenses; if it provides for a 20 percent co-payment, you will be reimbursed for 80 percent of your covered expenses.
  • Limitation on yearly per-person outlay. This represents the maximum amount of unreimbursed expenses (such as $2,000) that you would have to pay for each covered individual in any one year. It includes the amount of your deductible, and a portion of the co-payments made by you during the year.
  • Coverage for type of care. Policies often apply different co-payment amounts and length-of-stay limits to the following: hospital rooms and doctor fees, surgical procedures, dental procedures, mental health services and out-patient care.

Tax treatment of premiums payments. Corporations generally can deduct the full cost of health insurance premiums paid with respect to their employees. In recent years, self-employed individuals, partners, and S corporation shareholders, have also been able to fully deduct their health insurance premiums.

Sources of Coverage

Employer-provided coverage. Look in "your own backyard." Before you run out to purchase your own health policy, make sure that you haven't overlooked alternatives that may be close at hand: coverage under your working spouse's employer-provided plan, or your former employer's COBRA coverage. If you can get coverage under your spouse's employer-provided plan through a larger payroll deduction from his or her paycheck, this probably will be your least expensive option.

Continuing medical coverage (known as COBRA coverage) that a former employer must, by federal law, make available to you for a period of time following your separation from employment may be more expensive than some policies available through other sources. However, COBRA coverage definitely makes sense in these two instances: if you are uninsurable because of poor health, or if your coverage is almost expired and you don't know if you can get new coverage before the old coverage lapses. In most cases, COBRA coverage lasts for 18 months after your separation from employment.

Professional, business and trade associations. You may be a member of, or be eligible to join, an association that offers health insurance. If so, take a look at the coverage available. It may or may not be a good deal.

Example

The National Association for the Self-Employed is one organization that offers health care benefits and options to its members, do the National Association of Professional Women and the National Restaurant Association. An Internet search for your industry's leading trade organizations may surface many options.

If an association that you don't belong to offers good coverage at a reasonable premium, it may be reason enough to join!

Health Maintenance Organizations (HMOs.) Health maintenance organizations (HMOs) are managed care organizations that you may be eligible to join. They aim to offer quality health care services at affordable premiums, but to do so they markedly decrease your choice of doctors and hospitals that you can use. Because HMOs typically require rather minimal payments (such as $10.00) for preventative and routine care provided at a member doctor's office, the HMO co-payment provisions are usually not very significant other than for "out of the ordinary" medical expenses or procedures. Provided you follow the certification rules of your plan, most of your major medical expenses will be completely covered.

Preferred Provider Organizations (PPOs.) Preferred provider organizations (PPOs) are also managed care organizations. If you are a member, you can go to any doctor or hospital for any covered care, but the amount that the PPO will reimburse you will be lower if you choose a doctor or hospital that is not on the PPO's list of preferred providers.

Individual health insurance policy. This is generally the most expensive insurance option and, generally should be considered when other options have been carefully explored. Whether, and at what cost, you can obtain an individual health policy from an insurance company will depend on your age, health, lifestyle and family history. More flexibility may be available with the purchase of your own policy, but that will usually come at a much steeper cost.

You may be able to significantly lower your premiums if you will agree to a high annual deductible amount, such as $1,000 or $2,000 per person. Although the prospect of having to pay the first $1,000 or $2,000 of medical expenses before even qualifying for any coverage may seem unreasonable, it may be a sensible alternative. If you could weather the worst-case situation of having to pay the full deductible amount for all the covered individuals in your family within the year, this high deductible may be for you. At a significantly lower premium than a comparable policy with lower deductibles, the high deductible plan would give you the assurance of coverage for catastrophic health care costs that could otherwise cause you to lose your house and business. Plus, you can offset a portion of the costs of a high-deductible health plan by opting to establish a Health Savings Account, discussed below.

Health Savings Accounts (HSAs). A health savings account (HSA) is a tax-exempt account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an "eligible individual" to take advantage of an HSA. Although you don't need IRS permission or authorization to set up an HSA, you do need to with a trustee, such as a bank or an insurance company.

To be an eligible individual and qualify for an HSA, you must meet the following requirements.

  • You must be covered under a high deductible health plan (HDHP), described later, on the first day of the month.
  • You have no other health coverage except
    • coverage for liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property
    • coverage for a specific disease or illness
    • coverage that pays a fixed amount per day (or other period) of hospitalization.
    • coverage for accidents, disability, dental care, vision care and long-term care
  • You are not enrolled in Medicare.
  • You cannot be claimed as a dependent on someone else's tax return.

High deductible health plan (HDHP). A high deductible health plan is exactly what the name implies: it is a medical insurance plan that has a deductible that is significantly higher than the average health insurance deductible. However, it also sets a maximum amount that you must pay each year. This maximum is the limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. Out-of-pocket expenses include copayments and other amounts, but do not include premiums. These amounts are set by law and are adjusted annually if warranted by inflation.

Tip

An HDHP may provide preventive care benefits without a deductible or with a deductible below the minimum annual deductible. Some examples of preventive care are annual physicals, including routine tests, routine prenatal and well-child care, child and adult immunizations, "stop smoking" and "weight loss" programs and screenings for cancer, heart disease, mental health conditions, substance abuse and other routine screenings.

The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2013.

Limitation Self-only coverage Family coverage
Minimum annual deductible $1,250 $2,500
Maximum annual deductible and other out-of-pocket expenses* $6,250 $12,500

Contributions to HSAs and MSAs made by self-employed individuals will be deductible in computing their adjusted gross income. Money in these accounts can then be used to pay for qualified medical expenses, including the insurance deductible and copayments. Any money left over at the end of the year can be saved for future years, unlike Flexible Spending Accounts (FSAs) which are "use it or lose it."

For more information, see our discussion of health insurance in the context of employee benefits.

Related Resources

Long-Term Care Insurance

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